Becoming an expert in cryptocurrencies and specifically bitcoin, you can know that there is the process of bitcoin mining. Bitcoin mining is an operation when you can generate bitcoins by yourself using only a computer. In this review, we will describe the process of bitcoin mining in detail so that you will be able to implement it by yourself.
Brief description of the bitcoin mining procedure
You may already know the system called blockchain and how it works. Blockchain is a ledger designed for data about bitcoin transactions. Mining bitcoin is an operation when people try to change data in a ledger by guessing numbers with powerful devices. Usually, specialists use ASICs for this purpose as they allow them to make manipulations faster than any other tool. The processing speed is crucial in bitcoin mining because all bitcoin miners are participating in a race for the fastest update of data during mining.
The idea is that the first person who picks a proper number gets a right to manipulate data in the ledger and earns a block reward for the quickest mining. The size of the reward changes in time, but the current promotion is equal to 6.25 bitcoins.
You should understand that mining requires miners with a high hash rate, and your PC is not suitable for it. Bitcoin miners spend a huge amount of money on upgrading their tools and achieving success in this process. The computing power of your device will determine the probability of earning BTC from mining.
The basic thing you should know now is an algorithm of BTC mining. Check the list:
- Compute your mining profitability
- Choose Bitcoin miner
- Create Bitcoin wallet
- Select mining pool
- Download program for Bitcoin mining
Go through these steps, and then you will be able to start the mining process. Of course, there are more peculiarities you should know to master your skills in mining, and we will discuss them in this article.
Content of the review in the list below:
- Definition and principles of Bitcoin mining work
- The difficulty of the mining process
- Upgrades in the work of Bitcoin miners
- Bitcoin mining pool
- The efficiency of Bitcoin mining
- Tutorial on Bitcoin mining
- Alternatives to common bitcoin mining
- Extra information about bitcoin mining
Definition and principles of Bitcoin mining work
Bitcoin is a system similar to banking because it allows making bitcoin transactions between wallets and funds. The main difference between these two systems is that BTC is not controlled by any authority. It means that it is a decentralized structure where bitcoin nodes (users of the bitcoin network) can make transactions of money personally without any external control.
Using a bank system, you can be sure that only one authoritative party will participate in transactions. You can come to your bank or use a mobile app and transfer funds to your friends, and only the bank will have access to transaction history. So, a bank is the only party that records the history of transactions in the ledger and can manipulate it.
On the contrary, the Bitcoin ledger is not protected by one organization so that people can update the info in it without any effort.
Operating principle of Bitcoin mining in the blockchain
Bitcoin ledger, a blockchain, allows everyone to change data about bitcoin transactions in the network. The only thing you should do to earn money with bitcoin mining is to guess the number created by the system suitable for the automatically generated equations. The thing is that people cannot do it by themselves because it will take a lot of time to guess this number and produce proof of work. That is why you should use special hardware for this task which is an expensive investment in mining.
Your success in crypto currency mining depends on the processing power of your equipment — the higher the hash rate of your device, the more guesses you will make in one second. Once you find the suitable number in the bitcoin network, you will enter the address of your wallet and make transactions of mined money to your account.
This guessing process will take a lot of time, but you will understand that you have solved the problem easily. It is similar to a game with a Rubik’s cube when the success is easy to see from the cube itself.
The algorithm works like this: you determine the destination of the bitcoin transaction in the bitcoin network when your device picks the right number. It means that you will choose the next block in the ledger for the BTC you earned from mining. This process is also known as proof of work that verifies transactions.
The moment of entering a new block into the block chain is the main achievement of every miner because the process of mining is complex, and not every miner in the bitcoin network can do it properly.
After the updating of the chain, the transaction will be again recorded in the ledger, and other bitcoin nodes will be able to confirm your mining result. This process is crucial here because every user should update the blockchain according to changes you have made.
You will receive the reward for the time and effort you spend on the process of guessing, and now it equals 6.25 bitcoins. Moreover, you will earn the fee that you mined in the blockchain. However, even this amount of coin would not give you profit if you did not prepare for mining properly.
The name of the mining procedure is confusing because you just manipulate with the bitcoin network guessing the number. The result of this operation is similar to the outcome of mining when you extract bitcoins from the system.
Besides, there is a low probability that one miner will have access several times in a row because of the statistical laws. Usually, different bitcoin miners update the blockchain because the process of guessing is based on mathematical theories. So, do not think that one success will lead you to rewards every time you mine bitcoin from the blockchain — it is a long and requiring process.
The difficulty of the mining procedure
You probably are excited by the idea that computers will make all the work and you will just get money from bitcoin mining, but this operation is much more complex.
There is the rule in bitcoin mining that the mining difficulty of the equation increases with the increase in mining power in the bitcoin network. The inventor of bitcoin Satoshi Nakamoto, established this norm. It means that mining energy should be regulated to avoid over difficulty producing proof of work and guessing the number.
The more people want to solve equations, the harder it will be for every participant in the mining procedure at a particular time. This principle is called mining difficulty among experienced bitcoin miners.
The rule is crucial for cryptocurrency trading because otherwise, mining will lead to an inflation of crypto. There is no possibility of finding a suitable number more often than once in ten minutes for all the blockchain members. This period is enough to provide stable and regular replenishment of the ledger by new transactions.
However, you should remember that ten minutes is an average period of guessing because sometimes it is possible to achieve success in two minutes, but the next problem will be solved only in one hour. The system is self-adjusted, and it means that it regulates the time of block every two weeks and is trying to balance the period to ten minutes. So, if the average time of guessing was smaller than ten minutes during the first two weeks, the mining difficulty of the problem will be increased in the next two weeks.
Upgrades in the work of Bitcoin miners
Mining with CPU
The first people who mined bitcoin were Satoshi Nakamoto and his friend, Hal Finney. So, it was not a popular activity to mine bitcoin when it all started. Moreover, there was a possibility to mine crypto with a personal computer, and Satoshi and his friend did it without special miners.
The thing is that the mining difficulty was low in 2009 because few people did it. That is why the CPU (central processing unit) on a personal computer was enough to solve problems at that time. The more people started to participate in bitcoin mining, and the more powerful tools were required to do this.
Mining with GPU
You can enhance the efficiency of your computer by adding a graphical processing unit (GPU). For this reason, people started to introduce GPU into the mining procedure when the difficulty of tasks increased.
Firstly, people used GPUs for computer games with highly sophisticated graphics, but then it became a tool for various purposes, including crypto mining. The main advantage of the GPU is its power which is 30 times more than the energy of the CPU. So, 2011 became a year when people started to use upgrades in their equipment for mining.
Mining with FPGA
Producing a proof of work was becoming more difficult over time, and miners added FPGA to enhance the performance of their computers for calculations. FPGA is an additional part of the hardware that is 3-100 times more efficient than GPU. However, only specialists had skills in an installment of FPGA and its usage, and that is why GPU was still more popular among miners.
Mining with ASIC
In contrast to previous applications, ASIC was developed only for crypto mining. Application Specific Integrated Circuit is hardware, the only function of which is to produce proof of work for mining.
ASIC is the main mining rig today, but of course, it had been developed since its invention in 2013. For instance, there was an option of ASIC, which can be connected as a USB, but later it became outdated. You could see that every six months, the new model of ASIC appeared on the market with the latest technologies included in it. However, the process of upgrade slowed down in 2016, and nowadays, intervals between the integration of new models of ASIC are longer.
Bitcoin mining pool
We can perceive mining as a team game where all competitors are trying to gather a group of experts to win the prize. The reason for collective work is that there are companies with expertise in bitcoin mining and huge funds for miners. So, you have no opportunity to compete with them because your budget is smaller than theirs. That is why individual miners usually find colleagues and are trying to achieve proper solutions together. These teams of miners are called mining pools.
An increase in the number of people causes an increase in the mining power of the team, and it allows them to guess numbers faster than individuals. If a team earns bitcoins and receives a reward, all the money is shared between team members. The important thing here is that profit is distributed not equally but following the contribution to overall mining power from each miner.
The mining pool is a great opportunity to earn bitcoin even for beginners because any power will be valuable for teams, and everybody will receive a benefit for their contribution.
Nowadays, there are more than 10 powerful mining pools in the world that are difficult to compete with. According to statistics, the most successful country in the world in the sphere of mining is China — people from China perform more than 65% of all mining operations. The reasons for that are a comfortable climate, low manufacturing, and electricity rate.
The efficiency of Bitcoin mining
The notorious mining difficulty should not disillusion you: if you want to start bitcoin mining, make sure that it is a profitable activity for you. On average, bitcoin mining is not beneficial, but still, it depends on several factors. Start with the calculation of your future profit using the list of factors you need to consider.
The principle of reward is that it decreases every 210,000 blocks or approximately four years. For instance, the prize for mining in 2009 was equal to 50 bitcoins, and then it halved in four years. Today’s reward is equal to 6.25 bitcoins, but this price was set in May of 2019. So, the value of the award will be equal to 3.125 bitcoin in 2024 because of regular block-halving.
To understand this factor and its influence on the profitability of mining, we should clarify the terms hash and hash rate. We described the mining process as the solution to a math problem called the hash. Hashrate is a measure of your computer’s ability to make computations. The faster your device can make guesses, the higher is its hash rate.
There are several units in which hash rate can be measured: MH/s (mega hash per second), TH/s (terra hash per second), PH/s (Peta hash per second).
As devices require electricity to work, you should estimate how much money you will spend on this expense item. Check your bill for electricity costs and the price of one kilowatt of electricity in your area. Remember, you will spend electricity on the power of computations and on the cooling process to avoid overheating of your computer.
Difficulty of mining
It is a measurement of mining difficulty at the moment. As you already know, it can be changed with the number of active participants in the mining process.
Being a member of the pool is not free of charge option because pools are organized by a group of people who spend their time and efforts on it. So, the pool will take a commission from the overall award, and usually, it is around 2%.
Miners will take energy from your device, and it is important to include this factor in estimates of profit. All miners have different power consumption, and you can check the number for yours on the Internet. Watts are the units for the measurement of power consumption. This mining difficulty is considerable in terms of climate change.
The market price of bitcoin
It is an almost impossible task to predict the price of bitcoin, but you still should make an analysis and estimate an approximate value for you from bitcoin. Use the currency exchange rate you will transfer bitcoin to and compute your income from bitcoin mining. As the currency rate is an unstable factor, you can make several predictions about the value of bitcoin that are interesting for your currency, its increase or drop in the future. By the way, reading articles of financists about future values of currencies is always a practical approach to investments. Make sure you refer to trustworthy articles and reviews because there are a lot of spam posts about the currency rate and value of bitcoin nowadays. With the fluctuations on the market, mining difficulty increases, too.
Changes in mining difficulty
The Bitcoin network increases in time, and that is why the difficulty of mining is difficult to predict. You cannot be sure about the number of people interested in mining even for the next day, but this part is crucial for your profit.
Even though the price of bitcoin is not stable and more and more people participate in the bitcoin network, it still can be profitable for you to start mining now. However, your estimates will be rough because of the unpredictable variables.
To estimate your profitability, you can use special services such as bitcoin mining calculators. It will show you the result of your monthly profit from mining based on the variables you include. Pay attention to the outcome of calculations because a negative one means that your preparedness for mining does not match the suitable one.
Tutorial List on Bitcoin mining
In this part of the article, we will explain the process of mining step-by-step so that you will be able to start it right after reading.
1 — Estimate profitability
You should not start any business if you are not sure it will bring you money, and that is why you cannot skip this step. We have already described the way you can calculate the profitability of mining for you in the previous part of the review. Gather data about every factor that can influence this indicator and use special calculators to find out the exact amount of money you will earn.
Make sure you have funds that you can spend on mining from the start because it will not make any sense to mine bitcoin without proficient miners and access to cheap electricity.
2 — Install mining hardware
After estimations, you should obtain the most suitable for your miner. Do not forget to make an analysis of all the options with reviews available today and check their features to choose the one more beneficial for your conditions. Mining difficulty does not encompass the registration procedure.
3 — Create a bitcoin wallet
You will need to withdraw your income (your consent choices, as well) from mining to your bitcoin wallet, and that is why you should create it. If you already have a bitcoin wallet, make sure you know its address which should consist of a long combination of digits and letters.
Most of the platforms with wallets allow you to get addresses easily, but some of them are more complex. Make it carefully and avoid sharing your private key because it is a password that provides access to all your funds.
4 — Join a mining pool
Mining pools are suitable for everyone, even for beginners, as being a member of this team you will solve an easier problem than the original one. Mining pools have a higher probability of winning this game because the complex task is shared by small parts to every participant. You will receive profit according to your contribution, excluding the fee for participation in a pool.
Mining pools will provide you a more stable income from mining that will allow you to pay back all your investments in this activity.
We recommend you pay attention to several features of the mining pool during the selection. Check the list:
- Frequency of solving the problem
- Statistics of made operations in mining
- Method of reward (PPLNS, Pay per share, Score based, Proportional)
- Fee for being a member of the pool
- Way of funds withdrawal
- Reputation and stability of the pool
You can get info about these factors in reviews on pools or from specialized articles from BitcoinTalk. Another great reference with the comparison of pools is the Bitcoin wiki. Do not hesitate to ask questions and search for comprehensive data about pools because your income will depend on them.
Register to the pool and use your username and password for the next minings. It will decrease the overall mining difficulty.
5 — Obtain a mining client
Mining client is software for the control of your operations in this sphere. Most of the mining hardware includes clients, but some of them do not provide this service. You should choose software compatible with your hardware because all of them have different principles of work.
There are many guides on selecting suitable mining software on the Internet, and you can use them to make the right choice. Besides, you can compare the features of different software here.
6 — Mine bitcoin
Connect your miner to the computer and turn it on. Then you will need to log in to your account with the user name, password, and name of the pool if you are its member.
The work will start after the entry into the system, and you will be able to receive data from the blockchain and solve your part of the problem. As soon as you manage to find a block, you will earn part of the money according to the agreement with your pool. It is imperative to enter the name of the pool and username correctly when you enter the block chain.
Alternatives to common bitcoin mining
Mining with smartphone
There are some options to mine bitcoin with mobile phones even though they are not so powerful as ASIC. I believe that it is not an efficient way of mining because you will only discharge the battery and do not manage to mine a sufficient amount of money. Of course, your expenditures will be much smaller than for mining with special equipment, but the result will be appropriate.
Usually, mobile apps for mining allow you to work in the pool and get a reward for your contribution. However, such an approach to mining will not bring you a stable income because work in the blockchain requires more powerful devices than smartphones.
By the way, you can even use your old computer for mining, but the main disadvantage is that you will spend a huge amount of electricity on a powerless device. Your chance to get a reward rises with an increase in miners’ hash rate.
A great demonstration of worthlessness was an experiment of IBM when they tried to mine bitcoin with the 55-year-old computer. The result due to the mining difficulty was obvious — it is not profitable activity to mine bitcoin without investments in your equipment.
Cloud mining is an option when you do not need to pay the full amount for the purchase of mining rigs, but you can rent it. The cost will be estimated based on the amount of power you spent on the mining.
It may seem like a profitable alternative to investments in miners, but most probably, you will not receive any benefit from this renting.
If you make estimations of your profitability, you will understand that all of the offers of cloud mining are not beneficial for clients. Sometimes prices are low, but be cautious because there were cases when the company just received money from clients and disappeared. It is a trap for beginners who cannot properly calculate profitability and agree to work with any miners for a low price.
We recommend you beware of cloud mining to prevent huge losses in the future. If you still want to try this method of mining, do market research and estimate all your expenditures and profits accurately. Mining difficulty increases with the use of faulty apps and sites.
Web mining is a method when miners take power from bitcoin nodes of the chain and try to solve math problems with borrowed energy. Another name of this activity is “cryptojacking” because miners hijack power from other devices in the blockchain.
So, web mining means using CPUs of thousands of bitcoin nodes to make a profit for yourself. However, we have already said that CPUs are not suitable for bitcoin mining nowadays, and that is why it is applied today mostly to the mining of Monero. You can easily find sites for web mining on the Internet as there are more than 20,000 of them.
As a user of websites for trades of bitcoin, you may be surprised by the fact that someone can use the power of your computer to gain profit for themselves, knowing only data from the blockchain. Furthermore, they can break your CPU during the mining because of overloading. This is a reason for the controversial reputation of web mining.
Being an owner of websites, you realize that providing access to computers of strangers costs money, and it can become a beneficial service for you instead of an advertisement. Also, website owners manage the amount of power accessible for miners to avoid harm from the mining procedure, which also adds up to the mining difficulty.
Extra information about bitcoin mining proof of work
Some questions may appear in your mind after the reading of this article, and we tried to answer the most popular of them. Mining difficulty is also quite great due to the jumbo-sized body of miners.
The legal aspect of bitcoin mining
Several factors can influence the legality of this activity, and the laws of your country are one of them. In regards to mining in the US, there are no laws that prohibit this activity nowadays, even if it seems suspicious to you. Iceland and some countries are trying to control all the operations with bitcoin but even living in them, and you have a right to mine crypto.
For instance, authorities of African countries have never regulated any activities connected with bitcoin and its mining. Make sure you know all the restrictions about bitcoin mining in your country and others you work with not to be fined for this activity.
Expenditures to earn one bitcoin.
Let’s clear out how much money you will spend to earn one bitcoin from mining. We will use an example of miner Antminer S17 Pro and base our estimations on data for April of 2020.
Firstly, you will spend $1900 on the mining hardware itself, which will provide you 56 TH/s hash rate and require 2212 Watts. We also consider being a member of the mining pool, and it means that you will need to pay a 2% fee. The electricity cost in this example was $0.1/KwH.
When we know all the data, we can easily enter it into a mining calculator and receive the approximate cost of mining one bitcoin. The result showed that it would take three years to earn one bitcoin in given conditions. Moreover, you will spend $7,474 ($1,900 for hardware and $5,574 for electricity) during this period for mining. Here’s what mining difficulty also means.
Pay attention to the fact that we did not include costs for cooling, shipping, and other small items, but still, the final estimation can be different from this one. Mind the mining difficulty not to overestimate your expectations.
If you want to know the amount of bitcoin you can receive per day from mining, you can calculate it based on previous computations. So, you will be able to earn 0.0008 bitcoins per day using the equipment described above.
Overall usage of worldwide electricity by mining
Some people are sure that electricity consumption for mining is harmful to the planet and not relevant as a way of making money. However, there are strong arguments in favor of bitcoin mining with proof that it can even optimize energy consumption in the world. Watch the video to get more information about the influence of mining on the electricity network of the world. Meanwhile, in terms of the impact on nature, the carbon footprint produced has become obvious.
The problem of lack of bitcoin
There is one popular question about mining that is difficult to predict — is it possible that all bitcoin will be mined? There are 21 million bitcoins nowadays in the bitcoin network, and probably this amount will end in one day. However, there is a small probability that you will catch this moment because math calculations confirm that it will happen in approximately 2140. Mining difficulty has multiplied considerably as the numbers of miners have increased dramatically.
Also, as you know, miners earn not only bitcoins from the block they found but also a reward in bitcoins for providing proof of work. It means that if all bitcoins in blockchain are mined, then there will be crypto from the fees miners got. So, fees will stimulate miners to continue their work even though the reward decreases in time. In the future, these fees will be more valuable because of the high popularity of bitcoin.
The predominance of Chinese companies
Indeed, China is now a leader in the bitcoin mining industry, but there is a chance that bitcoin miners from other countries will take their place in the rating of world mining companies. The reason for the development of industries in other countries is that there is no opportunity to improve the technologies of the mining equipment. The technological barrier was reached, and now everything can change. Keep in mind the mining difficulty connected with the growing population of miners.
There is a comprehensive video with discussions on this topic from Andreas.
Google as a competitor in mining
There is a popular concern that Google can enter the industry of bitcoin mining, and it will not leave any chances for others. However, servers of Google are less suitable for cryptocurrency mining in comparison to ASICs.
Imagine that Google will concentrate all the resources it has only on the mining of bitcoins. Their servers will take a tiny part in the worldwide mining power — less than 0.001%. The reason for low estimations is the difference in the equipment of Google and tools that are suitable for bitcoin mining.
We hope that now you have a full picture of bitcoin mining, its proof of work, and its features. After the reading, you should decide whether you want to start mining or not based on all the tips we provided.
Make sure that there are no more profitable options connected with crypto than bitcoin mining to avoid extra difficulties with the supply of equipment. For instance, it may be more beneficial for you to buy bitcoin and speculate on this price. Another alternative is to mine other cryptocurrencies — Monero, Zcash, Ethereum. Check all the options and estimate profitability to get a stable income in the future.
How long does it take to mine 1 Bitcoin?
We described an example of mining bitcoin with certain conditions in this article. According to estimates, it will take three years to mine one bitcoin. Still, the period depends on the computing power of your mining hardware, cost of electricity, mining pool, and some other factors.
Is Bitcoin mining illegal?
There are no laws in most countries that prohibit mining bitcoin. You should not worry about the legality of mining if you check restrictions connected with bitcoin and block chain in your country.
What is Bitcoin mining actually doing?
Bitcoin mining is a process when people are trying to complete blocks solving math problems with their hardware to provide proof of work. The tasks are complex, and it is not so easy to achieve a difficult target as it may seem. In simple words, bitcoin miners work with verified transaction records and create new blocks through complicated computations. If they manage to solve the problem, they will receive a block reward and fee for successful mining, excluding transaction fees of bitcoins.
What is a good bitcoin miner?
Mining hardware has been changing a lot since the creation of bitcoin, and that is why updates of equipment appear often. Nowadays, you can find hundreds of mining hardware on the market but make sure it is suitable for you in terms of price, hash rate, and other device characteristics. As regards models that are in demand now, you can choose from several versions of Bitmain AntMiner, AvalonMiner, Dragonmint, and some others.
What math problem do bitcoin transactions solve?
Bitcoin mining is based on the hash function and especially SHA 256 one. Inventors of bitcoin made this equation difficult so that people spend a lot of time and resources to solve it. Moreover, they gather groups, also called mining pools, to divide problems into several parts and decrease mining difficulty. The mining difficulty has risen with the increase of the mining popularity.